Economic Entity Assumption Under the economic entity assumption, an economic activity can be identified to a separate entity accountable

e for that activity. In other words, this assumption states that businesses must keep their transactions separate from their owners, business units or other businesses transactions. For example, the business activities of the neighborhood coffee house are to be kept separate from the financial activities of its owners or managers. The financial statements for the coffee house will only reflect the revenue and expenses for the coffee house. Thus, it is possible to compare the financial statements of this coffeehouse with its competitors reports, since these statements should be reported separately under the economic entity assumption. Important to note, a separate entity does not necessary mean a legal entity. For example, financial statements for a parent company and its subsidiaries (i.e. separate legal entities) can be presented together (i.e. consolidated financial statements).

Going Concern Assumption For accounting purposes, the going concern assumption states that the financial activities of a business are assumed to be in operation for an indefinite period of time. This allows a business to operate with a view towards a long term. This is a very critical assumption as it provides that there is no short term end point in which all assets need to be sold and all debt must be paid off. Thus, the going concern assumption makes it possible to depreciate or amortize assets because we assume that businesses will have a long life. For example, if the coffee house was going to be sold, its assets would be valued at their disposal or liquidation value (sales price less expense of disposal). Under the going concern assumption, the coffee house values its assets at their original cost. As we can see, the going concern assumption is only inapplicable when business liquidation is imminent, and it should be used in all other business situations.

Monetary Unit Assumption This assumption states that information in the financial statements must be expressed in monetary units. The reason is that economic activity is expressed in monetary unit, and thus, it makes sense to apply the same basis for accounting purposes. Monetary units are relevant, universally available, and understandable. Using the neighborhood coffeehouse as an example, the intrinsic value of the best coffee server cannot be valued in the financial statements, regardless of how many customers frequent the coffeehouse due to this individual. The inherent value of this person cannot be quantified in the financial statements as an asset.

Time Period Assumption This assumption allows for the division of businesses operational activities into artificial time periods for reporting purposes as determined by the business owners. The coffeehouse can record information on a daily, weekly, monthly, quarterly and yearly basis during a time frame they deem relevant. However, there is a trade-off between the accuracy (reliability) and relevancy in preparing financial statements: the more quickly a company presents financial data, the more likely such data contains errors (i.e. less reliable information).

CHARACTERISTICS: A financial statement discloses a company's financial status by showing what a company has and what it owes. An accurate financial statement of the company is required by the SEC (Securities Exchange Commission). There are four types of financial statements: a balance sheet, an income statement, a cash flow statement and a statement of shareholder's equity. 1. Balance Sheet A balance sheet displays the company's assets, liabilities and shareholder's equity. Assets are things owned by the company, such as property, equipment and cash. Liabilities are the company's debts. Shareholder's equity, also known as capital or net worth, is the money that remains if a company sells all of its assets and pays off its debts. This remaining money would belong to the shareholders.

2. Income Statement An income statement shows how much money a company has earned or lost during a specific time period, which is usually a year. Income statements also define earnings per share, which is the money the shareholders would receive for that specified time period if it was distributed. 3. Cash Flow Statement A cash flow statement shows cash inflows and outflows that reflect a net increase or decrease in cash. It has three categories: operating activities, financing activities and investing activities. 4. Shareholder's Equity Statement A shareholder's equity statement outlines money that the shareholder has received or lost, depending on the financial status of the company. It reflects the changes in shareholder's or stockholder's equity during a period of time and gives a breakdown of stock transactions. The Balance Sheet logic is completely consistent with the two basic rules (the rules of debit/credit) that were demonstrated at the beginning of the tutorial. 1. Debit Side- Describes either assets that belong to the business (property, a real account, according to Rule No. 2 an asset is always a debit) or debts owed by customers to us. Customers according to Rule No. 1 - are a personal account that must be a debit (the accounting entity must have a "debt" to the business). 2. Credit Side- Describes the obligations of the business to either of two factors as follows: 1. External agencies (suppliers, lenders and so forth). 2. The owner of the business (Capital Account or accumulated profits). In either case, according to Rule 1 either the external agencies or the owner of the business are eligible to be "credited" with money from the business and therefore they are in credit.

Why does the Balance Sheet balance? In principle, there are two explanations for why the Balance Sheet must balance. A Logical Explanation. The Balance Sheet is in fact made up of two parts while: The total assets of the business (the debit side) = The total obligations to external agencies (the credit side) + the total obligations to the owner of the business.

An accounting explanation The Balance Sheet is made up directly from the Trial Balance (Balances) which is itself a Balance Sheet. It is clear, therefore, that if we went from a Trial Balance to a Balance Sheet, then the final result (a Balance Sheet), that also takes account of the balance in the Profit and Loss Statement, will be balanced.

Income statement (overview) The income statement is a historical record of the trading of a business over a specific period (normally one year). It shows the profit or loss made by the business which is the difference between the firms total income and its total costs. The income statement serves several important purposes: y y y y y Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit (return) Helps identify whether the profit earned by the business is sustainable (profit quality) Enables comparison with other similar businesses (e.g. competitors) and the industry as a whole Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement) Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business

The structure and format of a typical income statement is illustrated below: Boston Learning Systems plc Income Statement Year Ended 31 December Revenue Cost of sales Gross profit Distribution costs Administration expenses Operating profit Finance costs Profit before tax Tax expense Profit attributable to shareholders

2011 '000 21,450 13,465 7,985 3,210 2,180 2,595 156 2,439 746 1,693

2010 '000 19,780 12,680 7,100 2,985 1,905 2,210 120 2,090 580 1,510

The two simplest ways to analyze your financial statements are vertically and horizontally. A vertical analysis shows you the relationships among components of one financial statement, measured as percentages. On your balance sheet, each asset is shown as a percentage of total assets; each liability or equity item is shown as a percentage of total liabilities and equity. On your statement of profit and loss, each line item is shown as a percentage of net sales. A horizontal analysis provides you with a way to compare your numbers from one period to the next, using financial statements from at least two distinct periods. Each line item has an entry in a current period column and a prior period column. Those two entries are compared to show both the dollar difference and percentage change between the two periods. Re-order level: The reorder point ("ROP") is the level of inventory when an order should be made with suppliers to bring the inventory up by the Economic order quantity ("EOQ"). If the average daily usage rate of a material is 50 units and the lead-time is seven days, then Reorder level = Average daily usage rate x Lead time in days = 50 units x 7 days = 350 units When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern.

Definition of 'Government Grant'

A financial award given by the federal, state or local government to an eligible grantee. Government grants are not expected to be repaid by the recipient. Grants do not include technical assistance or other forms of financial assistance such as a loan or loan guarantee, an interest rate subsidy, direct appropriation or revenue sharing. There is typically a lengthy application process to qualify and be approved for a government grant. Most recipients are required to provide periodic reports on their grant project's progress. INVESTMENT PROPERTY: A property that is not occupied by the owner, usually purchased specifically to generate profit through rental income and/or capital gains. Opposite of non-investment property.